1. Raising Capital is Hard Work
This might sound obvious, but in this day of highly publicized deal-making many have the impression that all you need to do is hang out a shingle and watch the investment capital pour in. If your previous company was Twitter or Facebook, that might be true. But in 99% of all cases, it’s not so simple. A financing round can often take several months or longer to close. Besides putting the deal documents together and identifying investor prospects, it takes time to set up meetings and for busy investors to review your offering. Play it safe and start raising capital well in advance of when your company will need it.
2. Legal Bills are Expensive
Good lawyers aren’t cheap; bad lawyers cost even more. Young companies typically want to keep their legal bills down, and for good reason. The price tag for a 6-figure funding round can often exceed the 5-figure mark. And it’s not just because lawyers like to leave the meter running. The preparation of term sheets, cap tables, shareholder purchase agreements, and shareholder rights agreements—not to mention board motions and other governance documents—requires a lot of work, and it’s critical to get it all done right. Shoddy legal preparation can scare off savvy prospective investors, and lead to more headaches down the road when you have subsequent funding rounds or an exit. Don’t cut corners. Find a good lawyer who will defer their bill until after the raise is done, and don’t be afraid to ask them to use lower-rate associates and paralegals when it makes sense to keep the tab down. (Tip: Check out CapLinked’s Resources page for open-source templates of common business documents that you and your attorney can use as a starting point in crafting your own customized docs.)
3. Work Your Network’s Network
Your network is your greatest asset, but it has limits. As you start your capital raise, begin by reaching out to your contacts (including former colleagues, professional investors, and successful entrepreneurs that you know) and tell them what you’re doing. See if they’re interested in participating in your financing round, and ask them to make referrals to people they know who might be interested. Unless you have a huge network of contacts with many investors, getting referrals and introductions from your own contacts is generally critical to put together a 6- or 7-figure financing round. (Tip: Upload your contacts into your CapLinked address book to make it easier to send your deal out to your contacts. The address book integrates with Gmail, Yahoo Mail, Hotmail, and Outlook.)
4. Uncle Sam is Watching You
Many first-time entrepreneurs have never heard of “Regulation D” and have no idea that federal regulations apply to them while raising capital. The short history is that during the Great Depression the feds decided to regulate private company investment in order to protect unsophisticated investors from being scammed. Because of this, many private companies generally limit their equity or debt offerings to accredited investors, who are deemed “sophisticated” enough to be exempt from the red tape and legal risk surrounding non-accredited individuals. Be sure to discuss this matter with your attorney and advisors. For more information, visit the SEC’s website for definitions. (Tip: CapLinked’s platform is built to help you with regulatory compliance. When you create and share a deal on CapLinked, the recipient is asked if he or she is an accredited investor before they can view the deal.)
5. You’re Giving Up (Some) Control
Getting capital in the door is generally a good thing for a young or expanding company, but it comes at a price. Your new investors will expect to receive ownership in the company, and quite often they might want some form of control, as well. This could come in the form of a seat on the board of directors, or special rights for their class of stock. Be careful in your negotiations. Giving up some control to key strategic investors can make sense when it’s necessary to get the deal done, although ceding too much independence early on can lead to problems for everyone down the road. A bureaucratic board of directors can slow a startup management team’s ability to execute, and a complicated cap structure can scare off future investors. (Tip: One thing you can promise all of your investors is transparency, and CapLinked helps you to do this by giving companies customized investor relations tools such as messaging, dashboards, and document libraries.)
